Our Letter to Congress

We are the eMainStreet Alliance (emainstreet.org), a coalition of small businesses writing to express our joint opposition to the Marketplace Fairness Act (MFA). We would like to notify you of the consequences of the bill that will cause real harm to our businesses. We ask you to stand with us in opposition to the MFA.

We are Main Street, too. We are small businesses that sell goods on the Internet and we are being unfairly targeted by the MFA. If the purpose of the MFA is to provide more tax revenue to state and local governments and to level the playing field for small businesses, it will do neither. Instead, this law will give an unfair advantage to Walmart, Amazon.com and the other big retailers that support the bill and it will burden thousands of small businesses critical to our country’s economic growth and future prosperity.

1. Our retailers will pay between $20,000 and $300,000 in compliance costs in the first year alone.[1] It will cripple all of us and put some of us out of business. This bill heaps a compliance-driven financial burden upon us. Proponents of the bill have touted a “free” software that will make compliance “free” for online retailers. This reflects a gross misunderstanding of how online businesses operate. Small Business software, such as Quickbooks and many online shopping carts and order management solutions, would require an extensive overhaul or upgrade to integrate with the “free” software. We will be forced to incur significant software integration and upgrade costs. We’ll also have to modify the products in our databases and provide training for our staff on systems usage and compliance rules of every state. We will have to register and file time consuming monthly and quarterly tax returns in 46 states. In the first year of the law, the integration, compliance and remittance costs for our businesses fall between $20,000 and $300,000. Profit margins for online sellers are already razor-thin and many of our members above the $1M threshold estimate that the compliance costs will exceed their entire profits for the year. This will force layoffs and, in some instances, business closures. Businesses below the $1M mark will halt growth in order to stay below the threshold. This is a boon for Big Retail as it will stifle competition and keep small businesses small.

2. The law’s complexity will overwhelm us, subjecting us to rules in more than 9,600 tax venues.[2]The Bill does not address product tax exemptions and other variances from one jurisdiction to another.[3] Often, adjacent cities have different rules for similar goods. Knowing which items are taxable and how items must be classified often goes to “case law” based on sales tax appeals and can change at any time for any state. The calculation of sales tax is impossible for traditional mail orders and many of us sell via mail order.

This makes full compliance by small businesses not just burdensome, but impossible. If we wrongly classify a product and do not correctly charge a sales tax, states can require payment of taxes with penalties and interest. We fear that the complex and contradictory nature of the codes will not only bog us down in expensive compliance efforts, but will also – despite our best efforts to comply – be used to abuse us later during audits. Further, while the bill does require a single agency take charge of the process, it still leaves online retailers the chore of categorizing our products and to determine which products are exempt.

3. The bill drastically increases our audit risk by 4,500%[4] and exposes us to audits in states where we have no physical presence (nexus), no political representation, and no right to vote. We feel that we are being denied due process rights, which rights Congress has an obligation to uphold. The small number of online retailers relative to all retailers, coupled with the states’ well-documented thirst for additional tax revenue, ensures that we will be targeted repeatedly by the states. Even online retailers below the $1M threshold could be audited. How will states know if we are below the threshold unless they audit our businesses to find out? Many of us are already receiving letters from states demanding that we send them our sales figures. This practice will explode if the MFA is passed. Recent IRS behavior toward targeted groups has shocked all Americans. All online sellers will be subject to the “IRSs” of 46 states, and we will not have recourse to representation in 45 of them.

Furthermore, penalties for sales tax noncompliance tend to be onerous and most states can hold a company’s “Responsible Person(s)” personally liable for any unpaid sales tax liabilities.[5] A state can “pierce the corporate veil” and confiscate our personal possessions in order to collect unpaid sales tax owed by our companies. Unlike Walmart, Amazon.com, Best Buy, Home Depot and other big retailers, we do not have armies of accountants and tax attorneys to deal with costly and time-consuming audits from every state. Yet, one innocent mistake could put us out of businesses and even lead to personal bankruptcy.

4. Our businesses already experience significant disadvantages in the marketplace and these will be exacerbated, putting some of us out of business. It could cost approximately 220,000 jobs.[6]Proponents of this bill claim that MFA is necessary because online sellers have an unfair advantage. A common assertion is that physical sellers have to deal with rampant “showrooming” where a customer will visit their store to see a product only to then leave and purchase it online. This is a false claim. A January 2013 report from PwC shows that consumers actually act in the opposite way. Only 2% of the 10,000 consumers surveyed research products in-store and then shop online. However, 23% did the opposite and went online to research before buying in-store.[7]

Customers come to our online stores to read our product reviews, chat with our informed customer service representatives, watch our videos, read our detailed product descriptions, then they drive to the local Walmart, Best Buy, Home Depot, Target or other big-box retailers where they can buy the products immediately and do not have to pay shipping costs. The MFA will exacerbate this problem.

Physical retailers also: don’t have to deal with the constant harassment and litigation from software patent trolls; enjoy cheaper credit card processing fees and can take cash payments without paying processing fees; do not have to pay for packing materials; and do not have to pay to ship their products to customers.. The spike in gas prices over the past several years has caused shipping costs to balloon as well. In most cases, an order’s shipping cost far surpasses a sales tax cost.

5. That said, true Main Street physical retailers and true Main Street Internet retailers are not at odds. We are, in fact, allies. We both struggle to compete with big retailers who sell products below cost, engage in price wars, and use leverage, lobbyists, and political expenditures to get special favors from government. In 2012, big-box retailers accounted for more than 83 percent of online sales.[8]Their online market-share is increasing and by way of the MFA the growth of their retail oligopoly will accelerate. Walmart, Best Buy, Home Depot and Amazon.com don’t need more government favors. As our small companies grow, we will build physical stores or distribution centers in remote states to better serve our customers, just as Amazon.com, Best Buy and others have done before us. When we do, we will create nexus, begin to use state services, and voluntarily subject ourselves to the taxing authority in those states while benefitting from actual representation and due process.

The Internet is the last remaining commerce space where small businesses can actually compete with retail titans and contribute to economic growth. We represent nimble competition that big retailers want to crush. They want to ensure that our small businesses stay small forever or that we are pushed out of business altogether. Their newest weapon of choice in this permanent assault on Small Business is the MFA.

Congress, do the right thing. See this bill for what it is – a weapon for Big Retail to crush Small Business.

[1] Amount includes initial implementation and year one compliance, remittance costs and other associated costs. Based on bids received from reputable vendors and analysis as reported by OnlineStores.com, Scrapbook.com and others.

[3] For example, there are over 140 conflicting and overlapping codes for clothing and footwear alone. In Wisconsin US Flags and WI State flags are sold tax-free, while other flags are subject to sales tax. However, a flag bundled with a flagpole changes the rules. These are just a few of thousands of examples.

[4] Currently, most online retailers pay sales taxes to their state of resident. To be subjected to audits in at least 45 additional states is an enormous increase (4500%). In fact, the risk is probably higher given states’ thirst for additional tax revenue and the small pool of online retailers relative to all other retailers.